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Aussie couple's $1.4k hit reveals 'mortgage prison' risk of property 'leg up'

Alison and Andrew bought their first home with a 5 per cent deposit and have been watching their interest rate "go up and up and up".

High interest rates are adding a “steep financial cost” to millions of Aussie budgets and many are unable to take a simple step to ease the pressure because they are trapped in a “mortgage prison”.

Alison Naing and her partner Andrew recently finished building their first home and, despite only moving in last November, the 28-year-old told Yahoo Finance the Reserve Bank's (RBA) interest rate hikes saw their repayments skyrocket.

The Perth couple's monthly repayments went from $951 in December 2022 - when their construction loan was fully released - to $2,350 this March - an increase of $1,399 per month.

Refinancing has been heralded as a quick answer for mortgage holders struggling with rate rises to get relief, but this isn't an option for many Australians, including Alison and Andrew.

Alison Naing and partner on RBA interest rate increases, impact on mortgage repayments.
Alison and Andrew have seen their mortgage repayments skyrocket by nearly $1,400 per month, following the RBA's interest rate hikes. (Source: Supplied)

Are you struggling with your repayments? Contact tamika.seeto@yahooinc.com

What is a mortgage prisoner?

A mortgage prisoner is someone who is unable to refinance their home loan. This could be because you lack equity in your home or you don't meet a new bank's serviceability requirements.

Alison and Andrew bought their home with the government’s First Home Guarantee scheme in 2020, which allows eligible first-home buyers to build or purchase a new home with a deposit of just 5 per cent without paying costly lenders mortgage insurance (LMI).

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"Only a few lenders accept [the scheme]," Alison told Yahoo Finance. "So, one of the lenders that did accept it, our mortgage is with them at the moment."

In order to refinance and get a lower interest rate, the couple has to wait for the equity in their property to reach 20 per cent so they can avoid paying LMI.

Alison and Andrew's home in Perth
Alison and Andrew built their first home in Perth with the government's First Home Guarantee scheme.

When property values drop, borrowers who bought with a small deposit can also find their equity falls below 20 per cent despite them making all their repayments.

People most likely to fall into this category are those who borrowed at the peak of house prices in their area, with small deposits, like many first-home buyers.

Other borrowers can find themselves stuck in a "mortgage prison" with their existing bank if they are unable to pass a new bank's serviceability tests - where a 3 per cent buffer is typically added to a lender's interest rate to ensure borrowers can meet repayments.

Changing jobs to cover mortgage

Alison and Andrew's home loan was originally around 3 per cent but has now increased to 6.2 per cent, following the RBA’s 13 interest rate hikes.

“Because we were in the midst of construction, all we could do was sit back and watch interest rates go up and up and up, while paying for our rent and also our mortgage at the same time,” Alison said.

The only way the couple has been able to manage the demand of their increased loan payments has been by both of them getting new jobs. Alison works as a business analyst, while Andrew is in the superannuation industry.

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Alison and Andrew
Alison and Andrew are only able to manage their repayments because they secured new, higher-paying jobs. (Source: Supplied)

Alison said they were able to find new roles in the same industries as more opportunities opened up post-pandemic, with businesses starting to return to normal. They are paid more, but also haven't let their lifestyle spending get more extreme.

“If we didn’t change jobs then we would be in a bit of a struggle. But, because we’ve both changed jobs within six months of each other, that’s really helped with the cost of living," Alison told Yahoo Finance.

The cash rate has skyrocketed from a record low of 0.10 per cent to 4.35 per cent since May 2022. For the average $615,174 mortgage, this has added $1,394 per month to repayments, or $16,728 per year.

Homeowners missing out

New research by Resolve Finance found 41 per cent of homeowners had not reviewed their mortgage in the past 18 months. Meanwhile, an additional 40 per cent of fixed-rate borrowers had rolled over onto their lender’s variable rate, the survey of more than 1,000 borrowers found.

Resolve Finance managing director Don Crellin urged borrowers to consider refinancing if they could, or to speak to their existing lender to see if they could get a more competitive rate.

“Millions are inadvertently bearing a steep financial cost by failing to review their mortgages,” Crellin told Yahoo Finance.

By switching a $600,000 loan with a 30-year loan term from the average variable rate of 6.90 per cent to the lowest rate of 5.69 per cent, Canstar calculated borrowers could cut their repayments from $3,952 per month down to $3,479. That’s a saving of $473 per month or $5,676 per year.

With the Big Banks not predicting an RBA rate cut until September at the earliest, Canstar finance expert Steve Mickenbecker said refinancing could be a way for some borrowers to save now.

“Bringing a rate cut forward by refinancing into a lower-rate loan now will have borrowers double-dipping on savings and bringing them forward,” Mickenbecker said. “It’s time to look for a better rate now and not wait for the Reserve Bank.”

Mortgage prisoners told to 'hold on'

Compare the Market economic director David Koch has urged borrowers stuck in a "mortgage prison" to hold on.

“Banks generally stress-test borrowers’ finances to ensure they can still afford the mortgage repayments if rates were to climb 3 per cent but, since May 2022, the cash rate has surged by 4.25 per cent,” Koch said.

“This is one of the reasons why we’re seeing so many people fall into mortgage stress and are unable to refinance.

“But, if borrowers can hold on that bit longer, an anticipated 0.25 per cent rate cut within the next six months could provide them some relief or offer them an escape route from mortgage prison”.

Koch recommended borrowers try negotiating a lower rate with their existing lender, contact their provider for financial hardship assistance and contact the National Debt Helpline for free financial counselling.